City predicts little change under Clarke: CBI reports manufacturers' highest confidence for four years

THE CITY yesterday predicted that the appointment of Kenneth Clarke as Chancellor would make little difference to recovery prospects or policies, as the Confederation of British Industry reported that manufacturers' confidence in rising output had reached its best level for more than four years.

Financial markets greeted the news of Norman Lamont's resignation with barely a flutter, except a brief spell of speculation that base rates may be reduced from 6 per cent. Sterling rose one pfennig to DM2.5230 and was 0.6 cents higher against the dollar, at dollars 1.5505.

But analysts were divided on the prospects for even lower interest rates. Michael Saunders, of Salomon Brothers, said: 'I was pretty certain it was going to happen anyway. If the economy slows as I expect, a rate cut could come fairly soon.'

Otherwise, City economists saw the change in Chancellor as a political decision, motivated by the unpopularity of Mr Lamont and the Government in general rather than any deep internal dispute over economic policy.

Mr Clarke is therefore expected to press policies that promote recovery and improve the Government's fortunes. A tighter fiscal policy in the November Budget is still expected, but the emphasis may shift towards higher taxes and spending restraint, rather than outright cuts in spending.

Mr Clarke's recent prediction that sterling was unlikely to be taken back into the European exchange rate mechanism before the next election also suggests that the Treasury is unlikely to adopt a target for the pound.

Bill Martin, chief UK economist of UBS, said: 'They have rearranged the deckchairs, but the ship will carry on the same course.'

Chris Dillow, of Nomura Research Institute, added: 'The economy will recover and there will be an inflation problem by year-end. They are committed to non-inflationary growth without much idea of how to get it.'

Yet there were hopes that Mr Clarke might deliver a more coherent presentation of economic policy. Keith Skeoch, chief economist at James Capel, said: 'Mr Lamont's departure removes an important barrier to a restoration of credible economic policies.'

The muted reaction to Mr Clarke's appointment coincided with mixed economic signals, which suggested the recovery might still be at risk. Based on its May Industrial Trends survey, the CBI lifted its growth forecast slightly, to 1.6 per cent.

Although the CBI poll disclosed that export orders and total orders rose to pre-recession levels, it suggested that confidence over rising output in the next four months might prove too optimistic.

Since manufacturing industry's perception that stocks were more than adequate to meet demand was little changed from February, the CBI said rising demand might first be met from stocks rather than increased production on the factory floor.

Hopes of higher consumer demand were also dented when the latest figures for notes in circulation pointed to a sharp slowdown in the growth of narrow money supply, M0, to 3.3 per cent in the 12 months to May from 4.8 per cent in April. In May alone, M0 fell by 1.1 per cent, the steepest monthly decline since April 1971.

The CBI survey showed that 37 per cent of manufacturers surveyed expected output to rise in the next four months while 14 per cent forecast a decline. The resulting positive balance of 23 per cent was the highest since February 1989.

The CBI said the impact of the lower pound led to a negative balance of 5 per cent saying export orders were below normal, the lowest negative balance since June 1990.

A negative balance of 22 per cent thought total order books were below normal, the lowest since May 1990.

View from City Road, page 33